U.S. Petroleum and Other Liquids

U.S. weekly regular gasoline retail prices reached a 2015 year-to-date high of $2.84/gal on June 15, an increase of 43 cents/gal from early in the second quarter but 85 cents/gal below the same time last year. Strong demand for gasoline in both the United States and abroad has driven gasoline prices higher over the past two months despite relatively stable crude oil prices. Data from the U.S. Federal Highway Administration show Americans drove a record 988 billion miles during the first four months of 2015, compared with the previous record of 966 billion miles driven in the first four months of 2007. As a result, refinery wholesale gasoline margins (the difference between the wholesale price of gasoline and the price of Brent crude oil) have been strong in recent months leading to record high levels of refinery runs. U.S. average wholesale gasoline margins averaged 62 cents/gal in June, 28 cents/gal higher than June of last year and 25 cents/gal higher than the five-year average (2010-14) for June.

Refinery outages on the West Coast have contributed to gasoline prices in that region rising by more than the U.S. average during May. As those outages have abated and imports have helped resupply the market, regular gasoline prices in Petroleum Administration for Defense District (PADD) 5 declined to an average of $3.31/gal on June 29, 20 cents/gal lower than their recent peak on May 18. In June, monthly average regional gasoline retail prices ranged from a low of $2.55/gal in PADD 3, the Gulf Coast region, to a high of $3.36/gal in PADD 5, the West Coast. EIA expects gasoline prices to fall from their current peaks, with the U.S. regular gasoline price averaging $2.49/gal over the second half of 2015, 6 cents/gal higher than forecast in last month's STEO.

Liquid Fuels Consumption

Total U.S. liquid fuels consumption rose by an estimated 70,000 b/d (0.4%) in 2014. Total liquid fuels consumption is forecast to grow by 400,000 b/d (2.1%) in 2015 and by 120,000 b/d (0.6%) in 2016. The 2015 and 2016 consumption forecasts are about 20,000 b/d higher and 70,000 b/d higher, respectively, than forecast in last month's STEO.

Motor gasoline consumption, which rose by 80,000 b/d in 2014, will increase by a projected 170,000 b/d (1.9%) in 2015 as the effects of employment growth and lower gasoline prices outweigh increases in vehicle fleet efficiency. Gasoline consumption is forecast to fall by 20,000 b/d (0.2%) in 2016, driven by higher prices and a long-term trend toward more fuel-efficient vehicles.

Consumption of distillate fuel, which includes diesel fuel and heating oil, is forecast to rise by 90,000 b/d (2.3%) in 2015 and by 70,000 b/d (1.7%) in 2016. This growth is driven by increasing manufacturing output, foreign trade, and marine fuel use.

Hydrocarbon gas liquids (HGL) consumption, which decreased by 100,000 b/d (4.0%) in 2014, is projected to increase by 120,000 b/d in 2015 and by 60,000 b/d in 2016, as new petrochemical plant capacity increases the use of HGL as a feedstock. In addition, new HGL export terminal capacity contributes to an increase in HGL net exports from an average of 560,000 b/d in 2014 to 1.1 million b/d in 2016.

Liquid Fuels Supply

U.S. crude oil production is projected to increase from an average of 8.7 million b/d in 2014 to 9.5 million b/d in 2015 and then decline to 9.3 million b/d in 2016. The forecast is about 40,000 b/d higher for both 2015 and 2016 than in last month's STEO. The increase in the crude oil production forecast reflects upward revisions to estimated Gulf of Mexico production in the second quarter of 2015.

EIA estimates that U.S. crude oil production averaged almost 9.6 million b/d in the first half of 2015. This level is 0.3 million b/d higher than the average production during the fourth quarter of 2014, despite a 60% decline in the total U.S. oil-directed rig count since October 2014.

The most recent production estimates, which include historical data through April 2015, indicate U.S. output was 9.7 million b/d in April. EIA estimates that total U.S. production began declining in May, falling 50,000 b/d from the April level. Although total U.S. production increased in April, the data indicate that onshore production began declining in April. While the production estimates are subject to revision as new data become available from the states, the preliminary evidence is supported by reported April production declines in major producing states such as North Dakota.

EIA expects U.S. crude oil production declines to continue into early 2016, when total production is forecast to average 9.2 million b/d in the first quarter. Production is forecast to begin rising in the second quarter of 2016, returning to an average of 9.6 million b/d in the fourth quarter. A total of 13 projects are scheduled to come online in the Gulf of Mexico in 2015 and 2016, pushing Gulf of Mexico production up from an average of 1.4 million b/d in the fourth quarter of 2014 to almost 1.7 million b/d in the same period of 2016, an increase of 17%.

Expected crude oil production declines from April 2015 through February 2016 are largely attributable to unattractive economic returns in some areas of both emerging and mature onshore oil production regions, as well as seasonal factors such as anticipated hurricane-related production disruptions in the Gulf of Mexico. Reductions in 2015 cash flows and capital expenditures have prompted companies to defer or redirect investment away from marginal exploration and research drilling to focus on core areas of major tight oil plays. Reduced investment has resulted in the lowest count of oil-directed rigs in nearly five years.

Projected 2015 oil prices remain high enough to support continued development drilling in the core areas of the Bakken, Eagle Ford, Niobrara, and Permian basins. Forecast WTI crude oil prices create conditions in which continued increases in in rig and well productivityand falling drilling and completion costs make rig count increases and resumption of onshore production growth possible in 2016. The forecast remains sensitive to actual wellhead prices and rapidly changing drilling economics that vary across regions and operators. While projected oil production in the Gulf of Mexico rises during the forecast period, Alaska oil production falls. Production in these areas is less sensitive to short-term price movements than onshore production in the Lower 48 states and reflects anticipated growth from new projects and declines from legacy fields.

HGL production at natural gas processing plants is estimated to have reached a record level of 3.3 million b/d in April 2015, and it is projected to average 3.3 million b/d in 2015 and 3.5 million b/d in 2016. EIA expects higher ethane recovery rates following planned increases in petrochemical plant feedstock demand. Export terminal expansions will allow higher quantities of domestically produced ethane, propane, and butanes to reach the international market.

The growth in domestic crude oil and other liquids production has contributed to a significant decline in imports. The share of total U.S. liquid fuels consumption met by net imports fell from 60% in 2005 to an estimated 26% in 2014. EIA expects the net import share to decline to 21% in 2016, which would be the lowest level since 1968.

Petroleum Product Prices

Rising crude oil prices, strong demand for U.S. gasoline, and several refinery outages in the Midwest and West Coast contributed to an increase in U.S. regular gasoline retail prices from a monthly average of $2.47/gal in April to $2.80/gal in June. EIA expects monthly average prices to decline through the summer as refineries continue to produce high levels of gasoline and as demand begins to decrease following the peak in the summer driving season. EIA projects regular gasoline retail prices to average $2.63/gal during the third quarter of 2015, 11 cents/gal higher than in last month's STEO, and $2.34/gal in the fourth quarter.

The U.S. regular gasoline retail price, which averaged $3.36/gal in 2014, is projected to average $2.48/gal in 2015, 4 cents/gal higher than in last month's STEO, and $2.55/gal in 2016, which is unchanged from last month's STEO.

The diesel fuel retail price, which averaged $3.83/gal in 2014, is projected to fall to an average of $2.86/gal in 2015, 2 cents/gal lower than in last month's STEO, and then rise to $3.03/gal in 2016.

As with crude oil, the market's expectation of uncertainty in monthly average gasoline prices is reflected in the pricing and implied volatility of futures and options contracts. New York Harbor reformulated blendstock for oxygenate blending (RBOB) futures contracts for October 2015 delivery, traded over the five-day period ending July 1, averaged $1.80/gal. The probability that the RBOB futures price will exceed $2.35/gal (consistent with a U.S. average regular gasoline retail price above $3.00/gal) in October 2015 is about 5%.